Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's (ETR:BVB) stock is up by 4.6% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is:

9.8% = €32m ÷ €332m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's Earnings Growth And 9.8% ROE

To begin with, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 13%. Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien was still able to see a decent net income growth of 19% over the past five years. So, there might be other aspects that are positively influencing earnings growth. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So this also provides some context to the earnings growth seen by the company.

Next, on comparing Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 20% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is trading on a high P/E or a low P/E, relative to its industry.

Is Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien Efficiently Re-investing Its Profits?

Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien doesn't pay any regular dividends, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Conclusion

In total, we are pretty happy with Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's performance. Specifically, we like that it has been reinvesting a high portion of its profits at a moderate rate of return, resulting in earnings expansion. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.